Financial Intelligence, Revised Edition: A Manager's Guide to Knowing What the Numbers Really Mean

First, here’s another way of looking at IRR: it’s the hurdle rate that makes net present value equal to zero. Remember, we said that as discount rates increase, NPV decreases? If you did NPV calculations using a higher and higher interest rate, you’d find NPV getting smaller and smaller until it finally turned negative, meaning the project no longe

the economist John Maynard Keynes once pointed out, buying stocks is like trying to anticipate who will win a beauty contest. You want to choose not the person who you think is the most beautiful but the person you think everyone else will see as most beautiful.

Companies treat expenditures like these differently from ordinary purchases of inventory, supplies, utilities, and so on, for at least three reasons. One is that the expenditures involve large (and sometimes indeterminate) amounts of cash. A second is that they are typically expected to provide returns for several years, so the time value of money

The key ratio that measures accounts receivable, as we saw in part 5, is days sales outstanding, or DSO—that is, the average number of days it takes to collect on these receivables. The longer a company’s DSO, the more working capital is required to run the business.

But the term “shareholder value” crops up in a number of different contexts and has a variety of meanings. Sometimes it just means market cap; sometimes it refers to the expected future cash flows of a company (which, after all, is what investors are buying when they purchase a share of stock); sometimes it refers to the increase in dividends, shar

Some investors—Warren Buffett, for example—like to look at the “market to book” ratio. Buffett often tries to find companies that are trading at a market cap close to or even below their book value.

In general, shareholder value depends on market perceptions, which in turn are driven by: • The company’s current financial performance • The company’s prospects for growth in the future • The company’s anticipated cash flows in the future • The predictability of its performance—that is, the degree of risk involved • Investors’ assessments of the e

You can also look up the answer in the present value/future value tables found in finance textbooks. But we’ll also show you what the actual formula—it’s called the discounting equation—looks like, so you can look “underneath” the result and really know what it means. The discounting equation looks like this: where: PV = present value FV = projecte

The price-to-earnings ratio or P/E is the current stock price divided by the prior year’s earning per share.